Most industries experience some cyclical phenomena, but in
general insurance the business cycle (referred to as the insurance
or underwriting cycle) is particularly pronounced. This is partly
because of the existence of the need for insurable interest, which
militates against the existence of a secondary market – see
GIM1050.
Beginning at a ‘soft’ point in the cycle, this
is where premiums are low, capital is plentiful and there is keen
competition. As premiums continue to fall, underwriting losses
become pronounced. That tends to discourage capital and competition
for new business diminishes. Premiums start to rise and the market
hardens. Business starts to look attractive again for investors,
capital becomes more plentiful and the process begins again.
The cycle is fairly regular in less volatile business
classes, with a period (peak to peak) of about 8 years.
Underwriting results (as a percentage of net earned premiums) can
be plotted as a time series and the result is fairly close to a
regular (sine) wave. More volatile classes of business may be
affected by the happening of a catastrophe (such as a serious
hurricane), but the underlying pattern is still discernible and the
amplitude (the displacement) tends to be greater.
Here the graph is a time series of the size of initial over or underestimates of ultimate claims outturns. It is distinct from the underwriting cycle, but quite closely in phase with it. It is visible across different underwriting classes, and again is more irregular, and more pronounced, for volatile classes of business. The reasons for the existence of this cycle are a matter for debate. It may be that
GIM6000+ discusses the methods applied to adjust technical provisions for tax purposes where necessary.
